Will Wing Lung seal the deal with favored bidder China Merchants soon?

China Merchants Bank Co. was picked as preferred bidder for Hong Kong's Wing Lung Bank, people familiar with the matter said, paving the way for the city's biggest banking acquisition in seven years.
Merchants Bank is in exclusive talks with Wing Lung Chairman Michael Wu and his family, who are seeking to sell a 53 percent stake, the two people said, declining to be identified before an agreement is reached.
Merchants Bank, China's fifth largest by market value, beat out Industrial & Commercial Bank of China and Australia & New Zealand Banking Group to hold exclusive talks with Wing Lung, the people said. Merchants Bank, which pioneered wealth management in China, follows bigger rivals ICBC and China Construction Bank Corp. in targeting Hong Kong's banking market as the city builds closer ties with the mainland.
“The mainland banks want a platform in Hong Kong to expand overseas, especially in the wealth management area,” said Kenny Tang, director of research at Tung Tai Securities Co. “They can offer overseas wealth management products to mainland clients through their Hong Kong branches.”
Under Hong Kong law, a buyer of the Wu family's stake would be required to make a full tender offer.
Wing Lung, a family-run bank founded in 1933 with initial capital of $5,700, has 35 branches in Hong Kong and $12 billion of assets. On April 30, the bank reported a first-quarter loss after writing off $61 million of investments in structured investment vehicles and collateralized debt obligations.

Shares Rally
Merchants Bank, based in Shenzhen across the border from Hong Kong, had one branch in the city at the end of 2007, with 72 employees and 19.5 billion yuan ($2.8 billion) of assets. The company has 570 branches on the mainland.
Wing Lung has rallied 56 percent in local trading this year as speculation of a takeover mounted, bringing its market value to $4.5 billion as of May 23's close.
Taiwan's Fubon Financial Holding Co. bought International Bank of Asia in 2003 in a $415 million deal that valued the target at 1.16 times book value, according to Bloomberg data. The takeover was announced as Hong Kong was reeling from the SARS outbreak that killed 299 people, caused stocks to tumble and triggered a brief recession.
Patrick Poon, a spokesman for Wing Lung Bank, couldn't be reached for comment at his office. Lan Qi, board secretary of China Merchants Bank, wasn't immediately available for comment.

Reluctant Sellers
The city of 7 million people has 142 fully-licensed banks, according to the Hong Kong Monetary Authority. Yet takeovers of Hong Kong-listed banks have been rare because few owners are willing to sell.
That may change as larger, multinational banks muscle in, said Wayne Yu, an associate finance professor at Hong Kong Polytechnic University. Chong Hing Bank, controlled by the family of Chairman Liu Lit Man, may be next on the block, he said.
Chinese banks may target Hong Kong rivals to develop revenue sources outside their main business of making loans, said Yu.
“For the mainland Chinese banks, the majority of their revenue is based on interest rate spreads,” Yu said. “It's relatively new for them to engage in wealth management and other non-traditional services.”

China Pioneer
Merchants Bank in 2005 became the first Chinese lender to offer wealth management, capitalizing on the growing riches of a nation whose economy doubled in size between 2002 and 2007. The bank, run by President Ma Weihua, also pioneered dual-currency credit cards in 2002.
Revenue at Merchants Bank's wealth management division surged almost 10-fold last year to 54 billion yuan. At Wing Lung, income from selling such services doubled in 2007, the bank said in its annual report without providing further details.
Clients seeking to invest money outside China through Merchants Bank are mostly restricted to using the company's so-called Qualified Domestic Institutional Investor quota, currently at $1 billion. Hong Kong has no curbs on foreign investments.

'Strategic' Foothold
ICBC, the world's largest bank by market value, paid $231.5 million for control of Union Bank of Hong Kong in 2000, its first acquisition outside the mainland. China Construction Bank followed six years later, buying Bank of America Corp.'s Hong Kong and Macau unit for $1.24 billion in what was then the largest overseas takeover by a Chinese lender.
“Gaining a foothold in Hong Kong is seen as strategic, because Hong Kong is part of China and becoming more integrated with China,” said Simon Ho, a Hong Kong-based analyst at ABN Amro Holding NV. “Many Chinese banks don't have much of an operation in Hong Kong.”

How Will Hong Kong Banks Perceive These Acquisitions? Will They Be As Open To Take-Over As Wing Lung?